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Letting the IRS figure your taxes

Giphyvia Giphy

The Internal Revenue Service is exploring how it can offer free tax filing on its own, no help from outside private tax software companies as is now the case.

But the agency already offers a sort-of tax prep service. I, and the IRS, emphasize sort of.

You still have to fill in some (possibly a lot of) paper forms. And you have to send them by U.S. Postal Service mail by Tax Day, which is April 18 this year.

Plus, there are lots of limitations — income levels, forms that don't apply, deduction methods, and more — on who cannot use this service.

But if you jump through all the hoops, then the IRS will figure any tax you owe.

Doing the tax credit math: You may be asking the same question that popped into my head upon reading about letting the IRS figure your tax liability. Isn't that essentially what the agency already does when any of us file tax returns?

Yes. But in the official figure-my-tax case, the IRS also will calculate a couple of tax credits. They are the credit for the elderly or the disabled, and the Earned Income Tax Credit (EITC).

That EITC option is the only reason I can see for offering this service.

The EITC is an overly complicated tax break, which is one reason so many who are eligible for it simply ignore it. You know things are not good when you decide saving tax dollars, or getting a refund, is not worth the paperwork hassle.

Maybe the answer here is not to have the IRS do the EITC (and other) math here, but for members of Congress, who write the tax laws, to come up with better ways to help lower- and moderate-income workers.

And for all filers. But I digress.

Mailed bill or refund: Once the IRS figures your tax bill, after it calculates those applicable credits, it will send you a bill for any tax that is due. That will come as a snail mailed notice.

You should pay the bill within 30 days, or by the due date of your return if later. Don't miss the payment deadline, or you'll face penalty and interest charges.

At least this billing process gives you a bit more time to pay if you owe.

And if the IRS' calculations show you're due a refund, it will send it to you. As a U.S. Treasury check. Via old-fashioned mail.

Again, not a compelling reason to have the IRS do your tax math when there are some free options, including the agency's own Free File. This year if your adjusted gross income is $73,000 or less you can choose from seven tax software companies to complete your return and file electronically. This also includes getting any refund directly deposited.

But the option to let the IRS figure your tax is out there if you want to give it a go.

When the IRS won't figure your tax: Do note, however, there are several situations (referenced earlier) where the IRS will not figure your tax.

Specifically, the IRS has six reasons when it can't figure your tax for you. The collection is this weekend's By the Numbers figure and they are listed below.

  1. You want your refund directly deposited into your checking or savings account.
  2. You want any part of your refund applied to your 2023 estimated tax.
  3. You had income for the year from sources other than wages, salaries, tips, interest, dividends, taxable Social Security benefits, unemployment compensation, IRA distributions, pensions, and annuities.
  4. Your taxable income is $100,000 or more.
  5. You itemize deductions.
  6. You file any of the following 13 forms —

Form 2555, Foreign Earned Income
Form 4137, Social Security and Medicare Tax on Unreported Tip Income
Form 4970, Tax on Accumulation Distribution of Trusts
Form 4972, Tax on Lump-Sum Distributions
Form 6198, At-Risk Limitations
Form 6251, Alternative Minimum Tax—Individuals
Form 8606, Nondeductible IRAs
Form 8615 Tax for Certain Children Who Have Unearned Income
Form 8814, Parents' Election to Report Child's Interest and Dividends
Form 8839, Qualified Adoption Expenses
Form 8853, Archer MSAs and Long-Term Care Insurance Contracts
Form 8889, Health Savings Accounts (HSAs)
Form 8919, Uncollected Social Security and Medicare Tax on Wages

Other filing requirements: But wait, there's more. If you made it through the above list and meet the requirements to let the IRS figure your tax, in order for it to do that you still have some filing tasks.

IRS Publication 17 has details on the process in its Chapter 13. The "Tax Figured by the IRS" portion starts at the bottom of PDF page 106.

Basically, it includes basically doing everything but the final math,

Yep, time to check out Free File. Or Volunteer Income Tax Assistance (VITA). Or, if you're older, Tax Counseling for the Elderly (TCE). Or invest in a tax software program to use on your computer or online. Or hire a tax preparer.

You also might find these items of interest:

 

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